Will I break lifetime allowance rules if I start a new pension?

I protected my Lifetime Allowance at £1.5million and started taking drawdown on my self-invested personal pension four years ago at age 55.

It contained all my company pension entitlements and had a valuation of £1.375million at crystallisation.

I have already taken my 25 per cent tax free lump sum and used it.

I am considering going back into the workplace in some form but, now that work pension schemes have become mandatory, could taking a low-paid or part-time job possibly lead to me breaching terms of the LTA protection and incurring a tax bill on my drawdown? 

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Steve Webb replies: As you know, there is a lifetime limit on the size of pension pot you can build up and still benefit from pension tax relief.

This is known as the Lifetime Allowance or LTA. Back in 2011/12, the LTA was £1.8million, but this was cut to £1.5million in 2012, to £1.25million in 2014 and £1million in 2016.

It has been increased slightly since then, and stands at £1,073,100 in the current tax year.

When the cuts were made, it was recognised that they could be unfair for those who had already made plans on the basis of the old (higher) limits.

So a system of ‘transitional protections’ was introduced. ‘Fixed Protection’, which is the sort you have opted for, allowed people to ‘lock in’ at the old rate (£1.5million in your case) provided certain conditions were met.

‘Individual Protection’ allowed people to lock in a personalised LTA based on the current value of their pension savings.

One of the conditions of keeping your Fixed Protection (and locking in to an LTA of £1.5million) is that you don’t do any additional pension saving.

To be more precise, your Fixed Protection would be lost if:

– You start a new pension arrangement OR

– You make new contributions into a ‘pot of money’ (known as defined contribution) pension OR

– You build up additional rights in a salary-related (known as defined benefit) pension.

As you have pointed out, if you start a new job, provided that you earn more than £10,000 per year, your employer would ordinarily be required by law to enrol you into a workplace pension and to put money into it.

If you took no action, this would breach one of the conditions of your Fixed Protection which would then lapse.

Happily, there are two ways round this problem.

The first is that an employer has an exemption from the automatic enrolment rules for a worker who has a protected LTA. This means that they will not be penalised if they simply do not enrol you into a new pension.

They are not prevented from enrolling you, but they are not required to do so. 

You and your future employer can read more about this on the website of the Pensions Regulator which is here. 

If, for any reason, your new employer was not aware of these rules or thought it simpler to enrol you in any case, you have a second option.

This is to opt out within the initial ‘opt out’ window, usually around one month.

Provided that you do this in time, the pension is closed, you and your employer get your contributions back, and the ‘system’ treats you as if none of this had ever happened.

As a result, your protected LTA would remain intact.